Factory output in unexpected fall

Factory output fell unexpectedly in June, an unwelcome reminder of the poor state of the country's economy as it faces new challenges from global financial turmoil and widespread riots in London and other cities.

The weak official data followed reports overnight from trade associations of low consumer confidence in the retail and property markets last month.

Uppermost in these consumers minds now will be television images of burnt-out, looted shops in the capital and other big cities, after a third night of rioting spiralled out of control.

The Office for National Statistics said industrial output contracted at its fastest pace since May 2009 in the three months to June.

A 0.4 percent drop in factory output in June, and a failure of North Sea oil and gas output to get back on stream after maintenance in May, meant the broader industrial output measure fell even more than the ONS had assumed when it made initial calculations of second-quarter GDP last month.

"The downside risks for the UK economy have increased and the risks that the UK falls back into recession have grown. The recent market turmoil might already be enough to tip the balance," said Vicky Redwood, of Capital Economics.

Redwood - one of the more bearish analysts of the British economy - put the chances of a return to recession at around one in three, adding that the euro zone debt crisis and U.S. credit rating cut were likely to cause more lasting damage than the riots.

All these factors will provide a grim backdrop for the Bank of England when it unveils new economic forecasts on Wednesday, which are expected to show cuts to growth projections for this year and next, and possibly even hint at more monetary stimulus.

"The worry is that plunging equity markets will hurt business confidence and lead to firms cutting orders thus prompting further falls in output. As a result, the prospect of further action from the Bank continues to grow," said James Knightley, an economist at Dutch bank ING.

A Reuters poll of 50 economists forecast the UK would grow by just 1.2 percent this year, lower than the official forecast of 1.7 percent. If true, that could undermine the government's debt-cutting targets.

The poll also put the chances of the Bank injecting more stimulus into the economy at 30 per cent, up from 25 in a poll last month.